BANK OKS DEAL TO SETTLE PENN SQUARE SUIT

David ElsnerCHICAGO TRIBUNE

Continental Illinois Corp. has agreed to settle a three-year-old shareholders` lawsuit over the banking firm`s Penn Square debacle for a total of $110 million, although shareholders still would not be assured of receiving the entire amount, The Tribune has learned.

The major stumbling block to the settlement is approval from the Federal Deposit Insurance Corp., one of the plaintiffs. ''It`s a very frail deal,''

said a source close to the negotiations. ''The FDIC may not go along, and the whole thing could fall apart. One part of the settlement is dependent on another.''

Under terms of the settlement, Continental would pay shareholders $25 million. Continental also would assign its rights under its officers` and directors` liability insurance coverage to its shareholders and the FDIC. Under that policy, shareholders would make a claim for an additional $20 million and the FDIC for $65 million.

But it is expected the insurance companies would refuse to pay the claim, and shareholders then would bring suit against them. Last week, Continental filed a federal court action seeking to force the insurers to honor the policy.

A spokesman for Continental said the bank has not agreed to any settlement. Lawrence Walner, one of the attorneys representing the plaintiffs, confirmed discussions with the FDIC, but said no agreement had yet been reached. The FDIC declined to comment.

Allstate Insurance Co. of Northbrook, Ill.; and Harbor Insurance Co. of Los Angeles--have sought to void the coverage and have sued Continental and its top officers and directors, charging that they covered up Continental`s problems in order to increase liability coverage from $40 million to $100 million.

The class-action shareholder suit accuses Continental of failing to disclose to investors the seriousness of its oil and gas lending problems stemming from the 1982 failure of Penn Square Bank in Oklahoma City and other problem loans. Mounting loan losses led to the near-collapse of Continental last year and a $4.5 billion federal bailout.

A derivative suit accuses former bank officers of negligence. That suit has been taken over by the FDIC. The agency also has filed suit to rescind special pension benefits that were given to four former top bank officers.

The insurance companies have argued that the bank`s liability coverage is invalid because, they charge, the bank lied about the extent of its problems. Further, the insurance companies contend that the claims are based on fraudulent activity by the bank`s officials, which they contend is not covered.

The FDIC is balking at the settlement because it feels it might be able to get more money out of the insurance companies if the case goes to trial and a judgment is entered against the bank. In addition, the agency is concerned that settlement might be interpreted as going too easy on the bank`s deposed officers, who include Roger E. Anderson, former chairman; John H. Perkins, former president; Donald C. Miller, former vice chairman; and George Baker, former executive vice president.

Those former officers are not expected to go along with the settlement unless the FDIC is willing to accept the bank`s rights under its insurance policy and spare their personal assets.

Shareholders affected by the settlement would be those who bought Continental shares between Sept. 1, 1981, and July 5, 1982. About 15 million shares traded in that period, but the precise number of shareholders is difficult to determine because many of the shares were held in the names of brokerage houses.

Ernst & Whinney, Continental`s former auditors and also defendants in the suit, are not part of the proposed settlement.